Volatility is a statistical characteristic that reflects the force of change in the value of any valuable asset, such as a currency, stock, or natural resource. In simple words, it can be called the amplitude of the fluctuation of value from the highest to the lowest.
This term is derived from the Latin “volatilis.” The meaning of the word is translated as flying, swift, fleeting. In the Russian language, it can be picked up another synonym, changeable and fickle. Volatility is the antonym for stability.
The indicator is calculated as a percentage of the change in the value of the asset. For example, if, for some time, the value of the Russian ruble against the dollar has changed by 7%, then the volatility of the ruble will be 7%.
Analysis of volatility in trading
Analysis of market volatility for a trader is like a weather forecast for a sailor. By tracking this characteristic, the trader has the opportunity to determine the security of entering the market and their chances to get away with it. The greater the volatility of the market, the more dangerous it is to store and trade its assets. At the same time, along with risks, high volatility increases the percentage of possible earnings.
The degree of market volatility is usually calculated from the price over a long period of time since changes over a short period can only reflect fluctuations in value within a particular market trend.
Different time intervals and calculations are taken into account when calculating the indicator. Therefore there are several types of volatility:
- historical (realized) – the indicator calculated at the actual prices for a certain period;
- implied (expected) — a change in value that can be achieved in the future due to future changes and the announcement of important news.
Historical volatility reflects past price changes. In fact, this indicator is taken into account as a standard allowable change in the value of the asset for a given period of time and is an indicator of the riskiness of investments and projected returns.
Expected volatility includes current volatility indices and projected changes in risks in the future. Various cost factors are added to the calculation of expected volatility.
It is important to note that realized and expected volatility rarely coincide, as the first is a fait accompli of the past, and the second-gives a forecast for the future, including many factors.
Volatility in crypto trading
The cryptocurrency market is characterized by particularly high volatility. On cryptocurrency trading platforms, changes in the value of bitcoin and other digital coins are often recorded at an indicator of more than 32% per day. This scale of fluctuations is peculiar only to cryptocurrencies.
The ultra-high volatility of cryptocurrencies is both an advantage and a disadvantage. Along with it, the potential earnings of investors and traders significantly increase, but at the same time, it is an attractive field for speculation.
The formation of the high volatility of cryptocurrencies is influenced by:
- lack of material security;
- chained the attention of society;
- high liquidity.
Also, high volatility is largely a consequence of the fact that the cryptocurrency market is still quite young and promising. It is constantly undergoing changes and innovations that affect the growth of the value of assets. But because many investors are not yet too confident about the future of cryptocurrencies, when there is a panic in the market, they are able to merge assets at low cost quickly. Together, these two factors create a high amplitude of prices.
The foreign exchange market is also not standing still. The daily change can see the presence of volatility in it in the rate of one currency against another. The interbank Forex exchange platform is built on these principles.
Currency market volatility is closely related to economic indicators in the country and the world. For example, the change in the value of the dollar is tied to the American economy. Most often high jumps are caused by fundamental factors:
- events in the world political arena;
- changes within the state;
- revision of the issue of coins;
- speculation, and panic.
The Volatility of the stocks
The volatility of stocks is the tendency to change their value for a given period. Changes in the value of shares are usually related solely to changes in the strategy of the particular company to which they belong.
General economic and stock factors also have some influence on the change in value. For example, during a panic in the global economy, the number of investments is sharply reduced, investors tend to transfer capital to more stable assets to preserve it.